The New Normal in China’s Cities

Decades of rapid urbanization in China created clusters of knowledge, manufacturing, and distribution in areas that benefited from well-established links to the global economy. Now, China is shifting toward a "new normal" – one in which cities will play an even greater role.

HONG KONG – For decades, rapid urbanization in China created clusters of knowledge, manufacturing, and distribution in areas that benefited from well-established connections to the global economy. But that growth model has reached its end. With the share of people living in cities rising to 53% in 2013, from 20% in 1981, China is shifting to a “new normal.” According to President Xi Jinping, the aim is to ensure annual economic growth of around 7%, driven by new opportunities in value-added manufacturing, information technologies, and modernized agricultural production.

In moving toward this goal, however, China will face difficult balance-sheet adjustments that cannot easily be managed by conventional fiscal and monetary policies. A new Deutsche Bank study reports that, last year, China’s 300 cities faced a 37% drop in their land-sale revenues – a major setback, given that land sales accounted for 35% of total local-government revenues. Such revenues had risen at an average annual rate of 24% from 2009 to 2013.

Moreover, annual consumer and producer inflation dropped to 1.5% and -3.3%, respectively, last December, owing partly to the sharp decline in world oil prices. China now faces deflation and an inhospitable external economic environment, and its urban centers are struggling with the complex interaction of solvency, liquidity, and structural issues.

Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. His latest book is From Asian to Global Financial Crisis.

Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor at Peking University HSBC Business School and at the University of Hong Kong's Faculty of Business and Economics.

Andrew Sheng and Xiao Geng find that China's urbanisation at breakneck speed is "shifting to a 'new normal'.” Xi Jinping's "aim is to ensure annual economic growth of around 7%" and increasing domestic demand may be a boost. Li Keqiang has also said, China needed to restructure its economy, moving away from exports and investment towards domestic consumption.
But is it a good idea that cities become more crowded? In the short-term urbanisation creates jobs and demand for housing etc. Yet in the long run, it would take a toll on the social fabric of the country. Precious farmland gives way to sprawling urban areas. Providing an infrastructure like roads, water and power supplies, sewerage systems, transportation etc. does create logistic and environmental problems, leading to pollution, congestion, noises etc.
The authors mention a "new Deutsche Bank study", which reveals that "last year, China’s 300 cities faced a 37% drop in their land-sale revenues – a major setback, given that land sales accounted for 35% of total local-government revenues". Yet most of the land sold has been seized from farmers, making land grab one of the causes of social unrest. Due to urbanisation and construction boom, local authorities have been able to generate tax revenues. In most cases officials and developers finance their project , by using the inflated property values as security. In the event of a housing bubble, these debts would be devastating.
With lower oil prices and China's slowing economy, it comes as no surprise that some "urban centers are struggling with the complex interaction of solvency, liquidity, and structural issues". Indeed, this is a wakeup call for the authorities to recalibrate their policies. Some have proposed an urban property tax. Yet it would not be welcome among middle-class home-buyers.
China needs to find a balance between urbanisation and its rural character. Beijing may be pushing hard for economic growth, seeing the benefits of China becoming an urban society. But it leaves the local authorities to their devices. Corruption and bad planning have often led to messy, chaotic outcomes, and ordinary citizens have to live with the consequences.

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